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Money markets had shown a 20 percent chance of a rise in U.S.
rates next month but that slipped to as little as 15 percent
despite the Fed sending a broadly upbeat message on the economy.
Aggressive language from the United States on Iran and a refugee
deal with Australia also put the focus back on the geopolitical
risks from U.S. President Donald Trump's administration rather
than the expectations of higher inflation that dominated
markets' initial thinking last year.
"The market has become increasingly sensitive to comments made
by Trump himself or his advisers," said Alexandre Dolci, a
strategist with BBVA in London.
"We have seen more and more anti-dollar jawboming from
officials, especially targeting Germany, China and Japan. That
has undermined the dollar in the past few days and is the main
driver of dollar underperformance since the start of the year."
The dollar index has fallen steadily since the Fed raised rates
in December <.DXY> and it hit a 12-week low in morning trade in
Europe, although traders stressed it was not obvious it would
fall much further ahead of U.S. jobs numbers on Friday.
"If anything had come along last night to reinstate the Fed
element of the equation the dollar would have rallied," said
Neil Mellor, a strategist with Bank of New York Mellon in
London.
"But there are overriding fears about what the Trump
administration is or isn't prepared to do about all these
antagonistic issues. Until we know, worries about his attitude
to the dollar are going to weigh on the market."
Against the yen, normally chief beneficiary of nerves about
global security or political risk, the dollar fell 0.8 percent
to 112.27 <JPY=>, moving closer to Tuesday's low of 112.08. The
euro hit an 8-week high of $1.0819 <EUR=>.
"We're still seeing long-term guys buying the dollar on dips,
expecting it to eventually recover on interest rate
differentials between Japan and the U.S.," said Kaneo Ogino,
director at foreign exchange research firm Global-info Co in
Tokyo. "But sometimes, it's a short-term market."
The weekly reading of client flows run by the market's biggest
player, Citi, showed hedge funds selling the dollar chiefly for
the euro or emerging currencies in the past week.
The Aussie <AUD=> added to gains in Asia to stand more than 1
percent higher on the day, driven by a recovery in exports in
the fourth quarter that sent its current account surplus soaring
and headed off any thoughts of a dip into recession.
(Additional reporting by the TOKYO markets team; Editing by
Jeremy Gaunt and Janet Lawrence)
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